6 Omens before a Stock Market Crash (Bear Market)

For video version go to: https://www.youtube.com/watch?v=CKTijz32CZk
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Just to get it out of the way, a “bull” is someone who makes money when stocks increase in price, while “bears” make money when the opposite happens. The battle between bulls and bears is very visible in stock charts. Here are the 6 Omens!

1. The Market is Haunted by a Horror Story
Gloomy tales about technology companies precipitated the Dot.Com Bubble, screams from the mortgage market preceded the 2007 Financial Crisis… which begs the question… will the next market crash be caused by the current horror stories in commodities?

2. The Market begins to Trade Sideways, but with Downside Bias
As the bull market enters its last stage, it begins to struggle keeping bears at bay. Up to this point, bears were perceived as run-of-the-mill doomsday prophets, but their case is now built on growing empirical data. Making matters worse, the bears begin to recruit from the bulls ranks, and these bulls-turned-bear demoralize the remaining bulls. The consequence is that we are stuck in a trading range, exacerbated by traders hedging in both directions.

3. Indexes glide through Technical Support Levels
An index is pretty much a collection of stocks based on some metric like e.g. sector or market capitalization. The technical support levels are previous trading ranges, and it is a bearish signal when these are broken, since the market is supposed to trend in an upwards sloping trend channel during a bull market. While pullbacks (5% from its highs) and corrections (10%) are a normal part of bull markets, we got reason to become bearish if the total drop is above 20%. One should heed that a prolonged period of sideways trading also is a case of lost potential gains. That is, we get a double-whammy… TIME IS MONEY!

4. Bulls begin to Invest more Conservatively, and revise Estimates
This warning signal is characterized by bullish hedging, where bulls gravitate towards stocks and sectors with more sound fundamentals. We also get messages that brokers begin to downgrade stocks, since the earnings picture darkens.

5. Bears begin to Takeover Financial Newspapers(websites)
Bulls gradually loose legitimacy in the media, and fewer want to make bullish bets in fear of looking like fools. At this point, the bears become hawkish… emboldened by the likelihood their vindication only is a question of time. This becomes self-reinforcing, since the market gets even more panicky by these recurring headlines. Short positions really being to build-up, and the market starts to fracture under the pressure.

6. Traders go from Buying to Selling the Dips
With the “buy low, sell high” dictum, traders typically load up during dips to reap profits. However, when they lose faith, they decide to sell the dip “whatever the price”. This is a clear sign that the bears are in control.

Leave your own thoughts below.

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